Economics is the study of resources, their scarcity and the unlimited wants of mankind. The most appropriate definition is that by Lionel Robbins who defined economics as ‘The science which studies human behavior as a relationship between ends and scarce means which have alternative uses.’ Analyze this definition closely.
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Malaysia, a mixed economy attempts to combine the advantages of Free Enterprise System and the Central Command System. The price mechanism is allowed to operate but in some cases the price mechanism fails or works against public interest. Identify the ways by which the State can intervene to correct the defects.
Analysis of Economics
As defined by
Lord Lionel Charles Robbins
An overview to economics
What do we usually think when we heard about the word economics? Perhaps it could be inflation, globalization, allocation, production, consumption, value of currency, demand, supply, market, multinational corporations or firms, customer, consumer, entrepreneurs, profit, finance, capital, labor, oil, rice, sugar, or flour. There could be thousands of words which we could link to economics simply because it embraces our way and cost of living. People are vigilant on everyday news of how much the oil increased nor decreased, neither about each country’s political and social issue’s current updates to have a picture of what might happen the next day and help them decide what are they going to choose and what are they going to forego.
This assignment will provide you an analysis of economics as defined by Lionel Charles Robbins. He was a British economist of the 20th century, lived 1898-1984. His definition of economics was discovered from his 1932 essay on economic methodology. According to him, “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
The scope of this study will be an integration of the peripheral points of his definition to come out with a clear depiction of what economics encompasses. Learned ideas and lectures by Mr. Nantha Balan, my lecturer for this subject, will be used as well as current issues gathered online, and especially books to expound Lionel Charles Robbins’ definition of economics.
Study of scarce resources
One of the main points about Lionel Charles Robbins definition is that resources are said to be scarce to fulfil human satisfaction. When he tackled resources, he was referring to land, labour, capital and entrepreneurs. According to him, all these are limited therefore we must carefully study how to decide with our choice and to allocate them properly. Nonetheless, all resources are factors of production of goods and services.
Land for example is considered as natural resources as well as raw materials. It is called natural since it is provided by nature. We use land and raw materials as inputs into production however it is limited. Mineral deposits in the ground such as coal, uranium, iron ore, copper, gold, silver and many others are available only in certain areas and cannot be found everywhere. Unimproved land is no different. It is limited too. Forest where we get woods and water which provides us food and sea minerals aren’t free for us to get with just a snap of our fingers. Each has cost of production that would depend on how much we can afford to produce and take its risk.
Labour is a form of human input. Man has an ability to work mentally and physically into current production. Sony, Samsung, Sime Darby, San Miguel Corporations, are huge companies, yet wouldn’t be successfully established without its commendable workers who had performed their talent with excellence from utility to machine operator, up to the supervisor. Giant companies as such, normally import workers to meet the demand of production but basically because the labour force available within the country isn’t enough and is limited.
Capital refers to “all inputs into production that have themselves been produced.” It means, anything which have been bought or considered as asset to use for production. This could be machines, transportation, a limited supply of factories, and other equipment. Capitalist don’t have abundance of this since these are limited on how much they can afford to supply the needs for production. And like the other resources, they are limited as well. Numerous firms have the skill to run their business huge however they can’t make it happen since their production depends on the current capital goods available for them. Therefore it takes time and hard work to make things possible. What I’m pointing out here is that it is normal for any capitalist to aim big however their capital is limited.
Entrepreneur refers to the talent that some people have for organizing the resources of land, labour, and capital in order to produce goods and services. They may be a specialist who has an expertise on certain field of study. In economics, we call it specialization. If someone has a great potential of earning, out of his knowledge or have an expertise to run a particular business, then he could be a successful entrepreneur. Thus, they are the one who were in charged for input production out of scarce resources, introduce new techniques, innovation, receives profit however corresponded with equal amount of risks too. Not everyone can be an entrepreneur. You must have the knowledge, capital and other factors of production to become as such. This is why Entrepreneurs are said to be limited.
By now you couldn’t be wondering why we cannot have all the things that we wanted to have. Primarily because we have a limited source of value in exchange of something we want and simply because all the things that are surrounding us are said to be limited as well, and has an equivalent worth of acquisition. These explanations enfold Lionel Charles Robbins characterization of resources when he mentioned “scarce means” on his definition.
Actually the core point of his study about resources drives a solution on how to allocate them properly. Allocation means distribution. Being aware of its being limited by nature, we must distribute them justifiably. This is to balance every input of goods and services since resources are said to be scarce.
Study of choice
I remember what my professor in economics told us during class, probably thirteen years from now. He said “there’s no such thing as free lunch” and that “men are said to be insatiable.” Honestly I never liked him because for me he can’t simplify explaining his graphs. However I realized, although I failed his subject, I learned a lot with those phrases he thought our class. When he mentioned “there’s no such thing as free lunch,” he meant to say, that, for every single thing we posses it has a certain worth of value. Even it was a dinner treat by a friend still the food you’ve eaten didn’t turned out like a magic or free of charge. Your friend paid for it. I have discussed this to incorporate with the wants that are referring to things or resources which men would like to have. Material things aren’t free and are limited to what we can afford of. I believe my previous professor’s teaching is somehow related to Lionel Charles Robbins theory as it has the same point with the book references I have read about Lionel Charles Robbins definition. It covers this part, “a relationship between ends.”
Now I will continue with the second phrase, “Men are said to be insatiable.” Insatiable is a verb which means, cannot be contented. Lionel Charles Robbins view the characteristic of man in general when he explains that “man has unlimited wants”. To integrate the two, we have unlimited wants because we cannot be contented. Man, having such behaviour yet resources are deliberately scarce incorporates the aspiration to “the study of choice” which is considered as one of the elements of his economic definition. It is presumable that out of our unlimited wants we should be able to identify our priority, our choice. This is taking into consideration the most important thing to us and is out of our means. Meaning things we can afford to have and which we cannot afford to loose. By referring to a large group like producers, they take into account the three questions of production; what to produce, how to produce and for whom to produce when determining their priority of choice. This is to give us the highest level of satisfaction among our options. As such measure explains a part of his definition “studies human behaviour.”
Level of satisfaction indicates a feeling of worth or the most appropriate term in economics is utility upon acquisition of something. It is determining whether what you have bought was worth buying or not. Normally when we are hungry the first order of a burger would have a high level of satisfaction. If we feel it was not enough, then the second burger would have the higher level of satisfaction however if you fill quite full, then the third burger could be a sudden cutback of your satisfaction. It could drop to zero or even to a negative value.
Now the moment you decide the best choice that would bring about the highest level of satisfaction, there is always a thing to forego. This is what he meant by opportunity cost. It could have been your option but might had a lesser or could be of the same value yet less priority and less utility therefore you decided to let it go in a replacement of something more important and which has a higher level of satisfaction. This segment is being covered by Lionel Charles Robbins definition when he mentioned “alternative uses.”
To sum up, Economics defined by Lionel Charles Robbins embraces how human end up choosing his level of satisfaction out of scarce resources. He had stressed much on resources referring to land, labor, capital and entrepreneurs as limited since it is accumulative and that it cannot be substantially sufficient to satisfy unlimited human wants. Human with such behavior explains why he must make decision to choose. Since everything has its own worth of value, there is always a thing to forego for every end result of each choice which is the opportunity cost.
His point of view helps us to realize that for us to have the highest level of satisfaction of any single thing we forego, we must have a keen analytic point of view in answering the three economic questions; what to produce, how to produce and for whom to produce. Then only we can achieve a justifiable allocation of scarce resources aside from having a high level of satisfaction. He defined economics from an individual aspect considering the fact that each and everyone contributes in a society that embodied economic process.
Malaysia, A mixed economy
There are three economic systems to determine the intervention level of the government in regulating the market. Market is being referred to “The entire enterprise of buying and selling commodities and securities.” Capitalist or free market is an economic system without any single government intervention, the other way around is centrally planned or a command market which is purely controlled and decided by the government. Third is a combination of the two systems which is called mixed economy. Here the government has direct intervention though it is actually based on free enterprise principle.
Malaysia is a paragon of a mixed economy system. It was one of the South East Asian Countries that experienced rapid economic growth in the early 90’s and dubbed as one of the Asian Tiger Economy. Its government set rules to directly intrude in its local market. It practice embargo of commodities which the government believed to be deleterious to the nation. Toyota, Honda, Isuzu, Mitsubishi, Nissan, and other foreign car companies couldn’t practice a full autonomy in the country’s market.
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This research will explain how the government of a mixed economy like Malaysia intervenes to correct the defects of price mechanism present in a partially free based enterprise system. Some book references and online website will be used as the basis of explanation, especially the idea learned from my lecturer, Mr. Nathan Balan.
Malaysia, a mixed economy
Most of the references I’ve read stated that all real-world economies are a combination of centrally planned and free market economy. Command economies like the late regimes of Eastern Europe weren’t either totally planned economy. Though the government decides the production of goods and services, it was allocated through the market. Vendors sell farm products at prices determined by supply and demand and consumers are free to buy in any amount they wanted.
Nonetheless, Malaysia has a clear depiction of their country as a mixed economy. The government intervention in the market paved way to its economic growth. The government decides on allocation of scarce resources so that it can everyone can have their share as a citizen of the country. Their interference brought about order in the market and welfare to the public. Firms have certain rules to follow set by the government to avoid exploitation of the resources as well as human rights. However, everyone has their own freedom to decide and have their own choice of whatever they could afford of buying in the market.
By 1997, the country experienced a recession due to regional financial instability. However it recovered in 2 years time with its tough economic measures maneuvered by the government. One of its developmental factors is fixing the currency rate by USD1 to Rm3.70. Its export reached US$83.5 billion in 1999.
Price mechanism is a market system where the price changes with response to changes of demand and supply causes to balance, demand equal to supply. At the point where demand is equal to supply, point of equilibrium occurred. This is the price where there is no shortage or surplus, a point of balance. Other points could be adjusted as prices respond to shortages and surpluses. Demand exceeds supply during shortage and supply exceeds demand during surplus. Shortages cause the price to rise and surpluses cause the price to fall. This system characterized a free market economy where consumers are free to decide what to buy with their incomes as well as firms on what to sell and produce neither workers on where and how much to work. It is the reason why price, demand and supply change.
The Graph above shows how price mechanism works. The green line represents the supply curve of burger and the orange line represents the demand curve of burger. At Rm5, quantity supply (S1) is 50 however quantity demand (D1) is 100. Obviously there is a shortage in supply of 50 to accommodate the other half of demand at this price. To overcome this problem, tendency is to increase the price to Rm10, the point of equilibrium. The supplier will have the ability to produce another 50 since they’ll be getting more profit and demand will be less since the price increased some household wouldn’t be able to afford the price of Rm10 out of their income. Any point below Rm10 will lead to shortage.
For some basic needs like rice, flour and sugar the government impose a price which is normally half the way lesser than the equilibrium price during shortage. We call it ceiling price so that firms won’t take advantage of the situation and most of all to extend the affordability of the commodities either number of demand. To give a definite price from the above graph, Rm7.50 could be a possible price ceiling therefore any seller of burger cannot mark up their price more than Rm7.50.
The price of Rm10 shows balance of demand and supply, D2 and S2 has 100 quantities. Market clearing come about therefore there is no shortage and no surplus. It is the equilibrium price. Rm15 shows a surplus case where demand (D3) 100 quantity lesser than the supply (S3). At this price, for some stabilized seller, to sell their burger to a larger number of quantity demands, they lower the price up to the point of equilibrium. This happens to avoid waste of products. However it wouldn’t be fair for the newly established seller who cannot afford to just sell their burgers at the lowest price it could be. In this case the government can impose a floor price to protect the small firms. From Rm15, the floor price could be Rm12.50 rather than Rm10. Therefore all burger sellers cannot sell their product lower than Rm12.50.
This phenomenon in market where there is a government intervention to impose ceiling price and floor price is no longer a free market. It thus shows an embodiment of a mixed economy system. They set certain limitations to firms but let the household decide.
Government Intervention in Mixed Economy
There are several reasons of government intervention in mixed economy. One of the reasons is the relative prices of goods and inputs. The government will affect the price to change through taxation, subsidizing or even by direct price control. They regulate a maximum price or ceiling price and minimum price or floor price of a certain product. Cheap housing is stimulated through rent control. Any of this approach definitely helps to protect some local industry and carries public welfare. Foreign car companies are selling their passenger car products with 140% to 300% import duty plus sales tax of 10% as imposed by the government to protect the local car producers, Proton and Perodua. Currently, fuel is subsidized by Rm1.60/liter but soon to dis-subsidize according to Malaysian subsidy 2010 report. The government will uncover the Rm1.60 by consequently increasing the price of gasoline from 14% then to 17% until it goes up to 40%. Once enacted, increase in price will be Rm0.10 every six months until 2012.
Agriculture and agricultural policy is another factor of government intervention. This is because agricultural prices are subject to considerable fluctuations. Farmer’s income may be very low in some years or consumers might suffer paying a very high price of food. If this situation happens then it will be very difficult to predict future prices. How can a farmer choose which of two or more crops to plant if prices cannot be predicted? Thus it will discourage them to make a long term plan in agricultural industry.
Next is relative income. By imposing income tax, welfare payments, or direct regulation of wages, rent, and others, government would be able to generate an income to use for public services. This is where they get funds for their projects that are absolutely for the people of its country like building public hospitals, schools, roads, bridges and many other public aids and institutions. Malaysia’s sources of earnings which are liable to income tax are profits from trade, business and profession, remuneration and profits from employment, interest, dividend or discounts, rent, royalties or premiums, pensions, and annuities.
What would happen if there won’t be any prohibition of production and consumption? Would it be better if guns and bombs are more abundant than food? This is why the government set rules on the pattern of production and consumption, a very significant point of their interference. Unsafe goods are not legal to produce like guns unless the firm has license to do so and the most popular regarding this issue is drugs. Standard and Industrial Research Institute is a Malaysian owned company who provides licensing and testing of products before it can be sold in market. In this way the government intervenes by assuring the quality durability and mark up price of the product.
Last factor is the macroeconomic problems like unemployment, lack of development and balance of payments, and inflation. Government addresses these issues through the use of taxes and expenditures. They control interest rates and bank lending, prices and income, and the foreign exchange rate. Unemployment had been addressed by providing assistant loans to small and medium industries with much less interest rates. This is to help people have their own income and avoid inflation rate which happens when there is an uncontrollable increase in price. Inflation’s effect is devaluation of currency as it goes higher. If the balance of demand and supply become out of control, buyers would change their spending habits and suppliers of goods would suffer therefore will cause them to reduce output.
Mixed economy is a combined practice of two extreme economic systems. It has the approach of a free market system by following price mechanism of demand and supply and a touch of centrally planned economy through some degree of control. Price mechanism as discussed previously shows a defect when supply and demand aren’t balance. Therefore government interference serves as the solution to the problem of such defect. They control price, income, production and consumption and even impose taxes to maintain a stabilized market. As a result it balances the distribution of income and resources to its people.
By way of closing, mixed economy like Malaysia where government have some control in maneuvering the market open to capitalist, shows an effective economic system that promotes sense of balance among producers and consumers. It even provides welfare to the public, industrialization by supporting large and small firms, public infrastructures and institutions and other assistance like hospitalization, people can make decisions, all national resources are utilized, provides freedom like enterprise ownership, and political freedom. Overall, in basis to factual examples provided above, it paves way to economic development of a country.